These are basic guidelines and considerations. Please consult a legal professional to find the best course of action for you.
Unfortunately, divorce and bankruptcy often go hand-in-hand. Neither is a particularly pleasurable experience; however, a little foresight can save some unnecessary hassles and setbacks which are otherwise likely to popup along the process.
What are my bankruptcy options?
Chapter 7 – A bankruptcy proceeding where all unsecured debt is done away with. Debtors get to keep certain exempt items such as their house, car, and retirement. These plans are normally completed within a few months. Applicants are only eligible for a Chapter 7 bankruptcy if they earn less than the median income for their area, hold primarily business debt, or qualify for some other exception. A Chapter 7 can only be filed by an applicant every seven years.
Chapter 13 – A bankruptcy proceeding where all or a portion of the debt is paid back to debtors over a 3- or 5-year period. Typically, debtors are placed on monthly payment plans which must be agreed to by the Trustee and the judge.
What does this mean for divorce?
Because the division of assets and debt is a significant point of contention in the divorce process, it is generally desirable to resolve much of the debt held by a couple before entering a divorce proceeding. Wiping the debtor’s slate clean in a short period of time, Chapter 7 bankruptcies work the best for resolving debt pre-divorce. If the couple is eligible for a Chapter 7, they can relatively quickly dismiss their debt, potentially minimizing the haggling over debt allocation in the divorce process.
If the couple is not eligible for a Chapter 7, it generally appears more desirable to file for divorce before bankruptcy. Cooperating to provide comprehensive financial data and submitting to five years of monthly payments does not always appeal to a couple preparing for divorce. In this case, it is better to divorce and pursue separate resolutions of debt. As an extra incentive to file bankruptcy post-divorce, one or maybe both of the spouses may be eligible for a Chapter 7 bankruptcy following divorce proceedings.
As a general rule of thumb, life is easier lived without the crushing weight of debt constantly hanging over your head. If it is possible, you should resolve your debt as quickly as possible. Filing a Chapter 7 pre-divorce should be the best alternative. Although this short explanation presents two of the most common paths, many other options exist. Before making a final decision, make sure to discuss your options with a bankruptcy attorney.